ECONOMIC GUERRILLA WARFARE THRIVING IN CHINA

BEIJING -- In northwestern Xinjiang province, color television sets, soap, liquor and many other products from elsewhere in China are difficult to find. In the markets of northern, eastern and central China, items from southern Guangzhou, such as Five-Ram bicycles and Hundred Flowers perfume, were once hot commodities but now are hard to come by. And in parts of Heilongjiang province, in China's northeast, heavy taxes on beer from other areas of the country have been imposed to keep the foreign spirits out.

All across China, local authorities have erected barriers to protect -- at all costs -- goods made in their own areas and limit the sale of such commodities as bicycles, televisions, tape recorders and refrigerators from other regions.

This economic guerrilla warfare, or regional protectionism as it is called in the Chinese press, is one of the biggest unintended consequences of the decentralization that has accompanied the economic reforms of the past dozen years, which were launched to transform the socialist economy into one that operates on market forces.

The problem is impossible to quantify, Chinese economists say, and it is impossible to calculate the overall damage to the national economy. But the latest wave of economic warlordism comes at a time of economic austerity, sluggish markets and emphasis in Beijing on renewed political control from the center. In that context, it is part of a larger political problem for China's leaders -- the increasingly contentious relationship between the provinces and central authorities.

The problem has become so serious that for the first time in at least 10 years that relationship will be one of the specific items addressed by party leaders at an upcoming meeting of the Central Committee. The meeting, postponed repeatedly because of differences over the country's economic and political direction, is now expected to be held in December. The party meeting will be preceded by a special economic conference on national strategy, Premier Li Peng announced last week.

Regional protectionism is not new to China. The feudal warlord economy characterized much of China's history before the 1949 communist victory. Waves of protectionism also marked the early days of the economic reforms, launched by senior leader Deng Xiaoping in the late 1970s, when shortages of raw materials prompted some provinces to set up border checkpoints to prevent silk cocoons, hogs, cotton and grain from going to other areas.

The aim of the reforms was to give the regions greater autonomy to develop their economies and achieve greater specialization and efficiency. But now, according to a Chinese economist quoted in an article about the problem earlier this year, the country's 30 provinces, municipalities and autonomous regions have become like "high-level dukes and princes under the same emperor . . . with each of them occupying a separate sphere of influence, they pursue their own development without coordinating with each other."

The methods of protectionism in China vary. Often, local governments issue lengthy regulations requiring numerous permits and quality-control tests as a way of excluding non-local commodities. Others impose high taxes. Some exact fines against enterprises that buy and sell such products. Some cities even instruct banks to deny loans to enterprises that buy such products without official approval.

Chinese officials recognize the severity of the problem, but so far, have been unable to do much about it. Despite the government's ability to control firmly the country's political life, there are numerous reasons for its apparent inability to rein in rebellious provinces on economic policy.

Part of the problem is that China has no law governing inter-province commerce. The country also has a weak banking system; there is no Chinese equivalent of the Federal Reserve that can help regulate the economy from Beijing. China's size is another factor; no leader has ever succeeded in micromanaging the vast country.

And Chinese leaders, while believed to be at odds over the best approach to getting the economy moving again without sparking inflation, seem to realize that they do not have all the answers and are reluctant to dictate economic policy to the provinces.

Even when they do issue directives, provincial officials often pretend to comply and then keep doing what they were doing to begin with, sometimes using high connections in Beijing. For some provinces, the reforms have brought prosperity and a degree of economic autonomy that they are unwilling to give up, and their prosperity has given them a bargaining advantage with a weak, cash-strapped central government that already is perceived by many Chinese to have lost its legitimacy after last year's crackdown on demonstrators for democracy.

"This is not the kind of problem that can be resolved by one directive," said Tao Pei, a researcher with the Institute of Finance and Trade Economics.

"You need to rework the whole fiscal system, the tax system and the price system, and that's not something they can do anytime soon," said one Western economist.

Before the economic reforms, China's central planners determined all allocations of resources on a national basis. But with decentralization, provinces were given much more autonomy and were held responsible for their profits and losses. Except for a fixed amount of revenue that they were required to turn over to Beijing each year -- the amount was different for each province -- any surplus was theirs to keep.

As a result, even in relatively backward inland provinces, factories rushed to make high-priced consumer goods. Because raw materials were underpriced, processing industries, such as distilleries and cigarette factories, quickly became the most popular because they were among the most lucrative.

In the past, poorer inland provinces such as Hubei and Shaanxi might have depended on getting their bicycles from Shanghai and Tianjin, cities that traditionally produced China's highest quality consumer goods. As a result of decentralization, these provinces are producing their own bicycles. But because of poor expertise or old equipment, the quality is inferior to those made in Shanghai.

To protect their own goods, no matter the quality, provinces erected trade barriers. For example, in the provinces of Jilin, Liaoning and Hubei some department stores have been told to sell only locally manufactured beer, liquor, detergent, bicycles and color TV sets, according to a report in the official China Daily newspaper. If they do not, they will be fined.

Sometimes, economic guerrilla warfare leads provinces and cities to follow an "eye for an eye, tooth for a tooth" ethic. Such was the case in Chu Xian prefecture, an agricultural region in Anhui province, and the industrialized city of Nanjing in Jiangsu province.

During the past years of reform, the two areas benefited greatly from economic cooperation. But earlier this year, sellers of Chu Xian beer, who never had problems selling their product in Nanjing markets, suddenly found that Nanjing authorities were requiring five certificates before sale, according to a report in the Economic Information newspaper. Chu Xian prefecture retaliated by closing its doors to some of Nanjing's industrial products.

In the central Chinese city of Wuhan, Shanghai razor blades are not sold because the city has its own factory making razor blades, said Jia Lurang, deputy director of the Institute of Finance and Trade Economics under the Chinese Academy of Social Science. "The Shanghai razor blades are better because they are inexpensive and last a long time," he said. "But the government wants to promote the sales of local products because they are from local enterprises, so Shanghai blades are kept out."

Because local authorities depend heavily on local enterprises to help fill the government coffers, the system gives governments an incentive to support and develop local enterprises, without regard to the quality of the product or cost efficiency. There is also an important political consideration: if the factories and enterprises are not protected and go bankrupt, local governments are faced with the prospect of unemployed workers and a threat to social stability.

The tendency to protect local products is even greater with current economic conditions under which consumer demand is low, retail sales are down and goods are piling up in warehouses.

Proposals have been made to ease the problem; the latest came in September by the State Council's Development Research Center, which proposed that the government act immediately to prohibit domestic protectionism and abolish local governments' power to keep out outside goods.

The center called for tax reform to reduce local government's fiscal dependence on revenue from local enterprises and for price reform to narrow the gap between the prices for raw materials and processed goods.

But, analysts say, it is not at all clear that even though the government recognizes the severity of the problem, it has the authority or the will to make the crucial decisions to regain the economic initiative from the provinces any time soon.

Lena H. Sun is a national reporter for The Washington Post, focusing on health issues, and was among a team of reporters who won a Pulitzer Prize for National Reporting in 2002. She has covered a variety of beats, including the Metro transit system, immigration and education, and she previously served as The Post's bureau chief in Beijing.